Week Ending January 15

WTI took a round trip this week, ending the same place it started. It had gained over a dollar, with Feb settling at $53.77/Bbl, only to give it back on Friday, when WTI settled at $52.36

As is often the disappointing reality of a rally, the back of the WTI curve has not risen as much as the front. It was curious this week that Cal 2022 picked up almost 70c despite a prompt month that was down 2c.

We understand the backwardation (downward slope) of the forward curve makes 2022 pricing much less attractive. The discount of around $2.50 encourages the use of options structures rather than direct, fixed-price hedges achieved through swaps. We do encourage most clients to lock-in 2021 prices aggressively, though.

Bottom Line: Despite a welcome rally and supply cut from Saudi Arabia, there are downside risks when prices cross through many producers' cost of production. Expect a lot of hedging activity from your peers as oil hovers around $50.

Is gas turning a corner? With winter half over, and trading focused on the final months of the strip, gas is moving higher. This week, Winter 2021-2022 rose by 6c, to reach $3.04/MMBtu. We're also seeing some early signs from the options market of more optimism in the Winter 2021-2022 strip.

If you expect to use a collar for next winter's hedges, consider setting it wide. If AEGIS is correct in our bullish outlook for the next 15 months, then call-skew is likely to come back, making it very expensive to increase the ceiling on a narrow collar.

Bottom Line: "Wait" is rarely good risk-management advice, but, we do believe the gas is market is fundamentally undersupplied in 2021 and needs a higher price to balance. That means collars and other options structures are generally favored for most clients, rather than swaps.